ENERGY POLICY:

As high gas prices loom, new Congress faces pressure on drilling

Party leaders in the new Congress have yet to unveil their full agenda, but lobbyists and observers see one issue they'll likely confront: what to do about rising gas prices.

Pump prices jumped over the past six weeks, and some experts predict they will continue climbing. Former Shell Oil President John Hofmeister predicts that increased worldwide demand and lack of production could push gas prices in the United States to $5 per gallon by 2012.

"We continue to demand more," Hofmeister said today, repeating comments he made that were first aired by "Platts Energy Week." "The world continues to demand more, and the U.S. has no plan to address it. That could drive us to the kind of numbers that get to $5 a gallon in this country."

While several energy economists and forecasters disagree with that prediction, it foreshadows the kind of rhetoric the new Congress will face, several people said. Oil companies and their trade group are rolling out a campaign to push for more production, said Tyson Slocum, director of Public Citizen's Energy Program.

"They're going to say we need an energy plan that focuses on fully developing U.S. energy," Slocum said. "That means opening up more areas to offshore drilling and ensuring that we preserve the existing array of tax breaks and subsidies."

The national average price for gasoline hit $3.12 per gallon yesterday, up 21 cents from the post-Thanksgiving price on Nov. 29.

Crude oil yesterday closed at $91.53 per barrel, up from $80.79 on Nov. 23.

Gas prices have long been a hot political issue. During the summer of 2008 when crude oil rose to a record $147 per barrel, GOP candidates rallied supporters with their "drill, baby, drill" slogan. Republicans gained traction with the energy issue until the economic crisis became a top concern.

After the passage in 2009 of the House climate bill H.R. 2454, groups opposing the legislation strategized that linking the threat of higher gasoline prices to the measure would undermine support (E&ENews PM, Aug. 20, 2009).

As new lawmakers take office, energy lobbying strategies are emerging. American Petroleum Institute, the trade group for the oil and natural gas industry, today unveiled a report on the "State of American Energy" (see related story).

The group is recommending that Congress support "policies that promote all energy sources, pursue policies that encourage investment in new energy projects and provide market-based solutions to meet energy demand." API wants lawmakers to oppose eliminating any of the tax benefits that oil and gas companies now receive.

"What we need today -- and tomorrow -- are policy choices that increase, not decrease, energy production," API said in its report. "Government policies should harmonize our energy and environmental goals, encouraging responsible development that creates jobs and helps drive our economy."

And the Obama administration signaled yesterday that it is thinking about how to respond to higher gas prices.

"A lot of conditions affect oil prices. But over the long term, it's safe to say that oil prices will go higher," Energy Secretary Steven Chu told CNN. Increased demand from India and China and exploration in more difficult environments, Chu said, "conspire to say that oil prices in the mid- and long-term future will be higher.

"The United States should prepare for that and take the steps necessary to use the oil we need as efficiently as possible," Chu added, "and also to begin to transition away from oil. For example, electrification of vehicles and things like that."

Planning on energy

With climate legislation almost certainly off the table in the upcoming Congress, gas prices could become the lever that forces action on energy, one energy lobbyist said.

"It is actually something that I think is a sleeping issue," said the lobbyist, who asked not to be identified so that he could speak freely. "The role of oil in people's lives and the rising cost of gasoline may be brought back to people by midyear."

The lobbyist said he has been advising clients that every five to seven years there is an "energy surprise" and that gas and crude oil prices could be the next one.

"People will be smart to plan for what an energy agenda might look like if oil prices do spike or continue their upward trajectory," the lobbyist said.

If gas prices keep increasing, Republicans probably will make a push on increased fossil fuel production, said Ken Green, resident scholar with the American Enterprise Institute think tank.

"We're likely to see a replay of the McCain-Palin 'drill, baby, drill,' drill here, drill now," Green said. "It will probably be a cause celebre for the tea party."

The natural gas industry could push for financier T. Boone Pickens' plan to switch more of the nation's trucking fleet to natural gas vehicles, Green said, but the administration would have to support greater use of hydraulic fracturing technology to allow for sufficient natural gas supplies.

Ethanol and biofuel groups might also advocate additional help for expansion of their products, Green said.

Republicans appear most likely to benefit politically if gas prices rise, as the GOP is perceived to be the party that backs increased fossil fuel production, Green said. Likewise, he said, Democrats could be blamed for blocking deepwater oil drilling.

Many GOP lawmakers and oil companies already have criticized what they call a de facto moratorium on deepwater drilling. Although the Obama administration lifted the ban put in place after the BP PLC spill in the Gulf of Mexico, new permits are not being issued, they argue.

"With producers unable to get permits since BP, that has a cost associated with it," the energy lobbyist said.

The Obama administration could face criticism for not issuing more permits, the lobbyist said.

Hofmeister, now CEO of the nonprofit foundation Citizens for Affordable Energy, advocates that Congress develop a 50-year energy plan. The first decade should promote increased production, among other policies, he said.

But experts disagreed about how much impact additional drilling could have. Crude oil is a global commodity, Green said.

"The world price is the world price," Green said. "Even if we were producing 100 percent of our oil," he said, if prices increase because of a shortage in China or India, "our price would go up to the same thing.

"We probably couldn't produce enough to affect the world price of oil," Green added. "People don't understand that."

U.S. production could be negated by decisions that the Organization of Petroleum Exporting Countries makes, said Philip Verleger Jr., energy economist, and David Mitchell EnCana, professor of management, at the University of Calgary's business school.

"Suppose the U.S. were to boost production 1 million barrels a day," Verleger said. "OPEC has the capacity to cut 1 million barrels."

The oil industry has been able to convince people there is a connection between U.S. drilling and prices, Verleger said.

API's chief economist John Felmy argues that more U.S. production would help address the supply-and-demand imbalance. The country could generate 10 million barrels of crude per day, up from the roughly 7 million barrels per day now produced. That 10 million would require far more activity than is now under way, he said.

"There's a substantial amount of oil," Felmy said. "These statements that we can't produce ourselves out of it are just silly."

Prices up?

There is disagreement about how much gas prices are headed up. Verleger said the current price jump is a blip.

"Oil prices were pushed up by the prolonged maintenance of a major refinery that supplies the East Coast," Verleger said. As well, he said, cold weather in Europe and on the East Coast shrunk supplies.

"Barring a war, barring major disruption," Verleger said, oil prices over the next year should stay in the $80-per-barrel range.

The Energy Information Administration in December predicted that crude oil prices would rise about $5 per barrel this year. For every $1 per barrel of crude oil price increase, gas prices rise about 2.4 cents per gallon, said Tancred Lidderdale, an EIA senior economist.

"Our forecast is for continuing increases in prices but not to the degree we've seen since the 1st of December," Lidderdale said.

Crude oil prices are driven by demand for products like gasoline and diesel, Lidderdale said. Growth in use of those products will push up demand for crude oil by about 1.4 million barrels over the next year, he said.

Lidderdale disagreed with former Shell President Hofmeister's warning of $5-per-gallon prices.

"That's not in our forecast," Lidderdale said. "It would take a significant disruption in global crude oil supply for prices to go that high."

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